The Federal Government Integrated Its Budget With Social Security To Make Its Deficit Look Smaller

I first became interested in Social Security back in the 80s. In order to become a Fellow in the Society of Actuaries you had to study all manner of insurance programs, both private and social, to understand the framework in which insurance and pension products existed.

The Greenspan Commission back in 1981-1983 proposed another large increase to Social Security taxes. The system only needed a small lift to get it past some demographic difficulties, but the Commission proposed, and Congress passed a large change, which would mean that the Social Security would develop a large base of Treasury Notes, because income to the system would outstrip benefit payments for a long time, and the proceeds would be invested in Treasuries, because they are a neutral asset. Investing in other assets would invite socialism and cronyism.

But really, what was needed was to move to a pay-as-you-go system, as Pat Moynihan suggested in the early 1990s.

But the fix could never be permanent, because even as taxes were increased, the benefits increased along with them, and there would come a day of reckoning. But when? There are three dates that many would point to:

When the excess of taxes over benefits would peak.

When benefits and taxes would be equal.

When the trust fund would be broke.

I always looked at the first of these, whereas most commentators looked at the last of them. My reasoning worked like this: the Federal Government has cynically integrated its budget with Social Security to make its deficits look smaller. This is like a drug to the government; the real pain will come to it when the subsidy begins to fall. By the time it goes negative, the US Government will account for it separately, so as to minimize the deficit again.

Given my view of how the US Government could no longer balance its books, the real change would come when they would have to increase their borrowing because there was not as much excess from the Social Security system.

When I first started looking at the Social Security system, the three dates in question were in the 2010s, the 2020s, and in the 2040s. I thought that those dates were optimistic, but what I did not expect was that the current economic crisis would accelerate the first two dates dramatically. As it is, date one has passed in 2008 (+/- a year), and I think the second date is happening in 2010. Bruce Krasting’s post highlights the details, but I would concur, this recession will not end rapidly in the place where is counts for Social Security — employment. We are not likely to see Social Security deliver surpluses to the US Government anymore. Thus I expect deconsolidation of Social Security’s finances with that of the Federal Government.

What I never expected was that dates one and two would come so rapidly — almost together. Let the morons who talk about trust fund exhaustion pontificate. “We have all of these assets with which to pay future benefits….” Nonsense. As they sell bonds issued to the Social Security System, they must issue even more debt to the public. How much can they bear, and at what yield?

After the meeting, I said to one Treasury staffer, “One of the quiet casualties of this crisis is that you lost your last bit of slack from the entitlement systems.”

“What do you mean?”

“Just this, prior to the crisis, Social Security and Medicare would produce cash flow surpluses for the Government until 2018. Now the estimates are 2016, and my guess is more like 2014. The existing higher deficit takes us out to the point where the entitlement systems go into permanent negative cash flow. This means that the US budget is in a structural deficit for as far as the eye can see, fifty years or more, absent changes to entitlements.”

He looked at me and commented that it would be the job of a later administration. No way to handle that now. To me, the answer reminded me of what I say to myself when I go on a scary ride at Six Flags with my kids. There is nothing we can do to change matters. The only thing to adjust is attitude. So, ignore the fact that you are afraid of heights, and enjoy the torture, okay?

The crisis has accelerated that date to 2010. That’s a lot of change in just eight months. The long-term problem is upon us now. We are at the point of no return, absent large changes that those influenced by Keynesians will resist.

There are no good solutions now. Budgetary cuts and tax increases reduce the possibility of government default. They also will tend to slow the economy, unless the tax increases stem from cutting cheating, and the budget cuts affect only things that are a fraudulent waste.

Once you reach the point of no return, it doesn’t matter what prescriptions one follows — failure is coming. One can shape the type of failure, but not that there will be failure.

PS — I have a signed copy of A. Haeworth Robertson’s book, Social Security: What Every Taxpayer Should Know. He was the Chief Actuary of the Social Security System for a time, and a noted skeptic of the program. He sent me the copy after I shared some of my misgivings with him in the 1990s.

Alas, but the average actuary has been skeptical of the Social Security system, and I have met many actuaries that work there, and they agree. But leaders of the Society of Actuaries, when asked to give a clear warning on the troubles to come have refused. I have my theories as to why — they curried favor with politicians for their own personal reasons. Sad.